Those who apply for a VA home loan must certify they will use their new home as the primary residence.
This is a requirement for VA loan approval and prevents the borrower from purchasing a home and then renting it out instead of living there. But those who purchase multi-unit properties are allowed to rent out the empty units they aren’t living in–borrowers are required to occupy at least one of the units, but not all of them.
Which leads some to a question–can rental income be used for the purposes of calculating the borrower’s debt-to-income ratio and securing the VA home loan?
The Department of Veterans Affairs addresses this question in Chapter Four, Section Two of the VA Lender’s Handbook. It says that in order for a lender to use rental income from the unit to be purchased as part of the borrower’s debt-to-income ratio, there are two requirements. The lender must verify:
• cash reserves totaling at least 6 months mortgage payments (principal, interest, taxes, and insurance – PITI), and
• documentation of the applicant’s prior experience managing rental units or other background involving both property maintenance and rental.”
But that’s not all. The VA Lender’s Handbook instructs the lender to include “prospective rental income” from the home to be purchased only if the folllowing applies:
• evidence indicates the applicant has a reasonable likelihood of success as a landlord, and
• cash reserves totaling at least 6 months mortgage payments are available.”
How much rental income may be included for purposes of calculating the borrower’s debt-to-income ratio if the above is true? According to the VA Lender’s Handbook, “The amount of rental income to include in effective income is based on 75 percent of:
• verified prior rent collected on the units (existing property), or
• the appraiser’s opinion of the property’s fair monthly rental (proposed construction).
Note: A percentage greater than 75 percent may be used if the basis for such percentage is adequately documented.”
As you can see, the lender is given plenty of additional requirements to fulfill in order to properly document income and cash reserves in these cases. If you plan to apply for a VA mortgage loan for a multi-unit property, be sure to have the right documentation to present to your lender in order to consider rental unit income as part of your debt-to-income ratio. You may need to furnish past rental records as a landlord, tax return information, and bank statements.
Do you have a question about buying a home with a VA mortgage? Ask us in the comments section.
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